Former Chief Advisor was not consulted before Demonetisation Decision

Former Chief Economic Advisor Arvind Subramanian has opened up about Demonetization.

Being highly critical of the decision of the Prime Minister, Subramanian said that the note-ban was a massive, draconian, monetary shock that accelerated economic slide to 6.8 per cent in the seven quarters.

He further signalled that he was sceptical of this hurried and unplanned decision and did not have any strong backed empirical view apart from the fact that the welfare costs, especially on the informal sector, were substantial.

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“Demonetization was a massive, draconian, monetary shock: In one fell swoop, 86 per cent of the currency in circulation was withdrawn. The real GDP growth was affected by the demonetisation. Growth had been slowing even before, but after demonetisation, the slide accelerated.”

In one of the chapters from his book, ‘Of Counsel: The Challenges of the Modi-Jaitley Economy’, Arvind added further,

“In the six quarters before demonetization, growth averaged 8 per cent and in the seven quarters after, it averaged about 6.8 per cent (with a four quarter window, the relevant numbers are 8.1 per cent before and 6.2 per cent after).”

Arvind Subramanian with Arun Jaitley

Shockingly or not so shockingly, in his book the former economic advisor hinted that he was not consulted before announcing demonetization.

The former CEA also said that he did not think anyone disputed that demonetization slowed growth. Rather, the debate had been about the size of the effect — whether it was 2 per cent points, or much less.

“…But when a shock like demonetization occurs, that primarily affects the informal sector, relying on formal indicators to measure overall activity will overstate GDP. This hypothesis goes only a small way towards explaining the puzzle since any squeeze in informal sector incomes would depress demand in the formal sector, and this effect should have been sizable,” he said.

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Known as an academic with an eye for detail, Mr. Subramanian’s economic surveys had rave reviews for their discussion on a number of issues including targeted government services, JAM (Jan Dhan-Aadhaar-Mobile) trinity and his identification of twin balance-sheet problems in public sector banks facing huge non-performing assets.

Mr. Subramanian, who had succeeded the high-profile Raghuram Rajan in the Finance Ministry in 2014, announced his resignation from the government on 20th June this year, with plans to go back to the US for research and writing.

This was the third high-level exit from the government after the departure of Raghuram Rajan as RBI Governor and the sudden resignation by NITI Aayog Deputy Chairman Arvind Panagariya.